https://www.nytimes.com/2018/06/05/business/dealbook/tech-stocks-economic-uncertainty.html?smid=tw-nytimesbusiness&smtyp=cur

Tech Stocks Are Hitting Highs as Economic Uncertainty Rises

 

 

By Stephen Grocer

• June 5, 2018
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Investors have returned to the safety and growth of the biggest technology stocks.

Five big tech companies — Apple, Amazon, Microsoft, Netflix and Nvidia — closed at historic highs on Tuesday. Alibaba and Facebook have done the same in recent days. The tech-heavy Nasdaq Composite has returned to record territory, up 8 percent since the end of April. The Standard & Poor’s 500-stock index and the Dow Jones industrial average remain 4.3 percent and 6.8 percent off the records they set on Jan. 26.

The rally has come as the global economy shows signs of strain. Fears of a trade war have made investors anxious; emerging market stocks, bonds and currencies have all sold off; and economic data in some regions has softened in recent weeks.

“In an uncertain world with significant downside economic tail risks, technology has been seen to be, correctly, relatively stable,” Peter Oppenheimer and Guillaume Jaisson, strategists at Goldman Sachs, wrote in a recent report.

Such economic uneasiness in the years since the financial crisis had caused investors to pour money into the sector. The likes of Facebook, Alphabet, Amazon and Apple have come to be viewed as having nearly unassailable revenue streams that could deliver growth in most economic conditions. With interest rates at historic lows and economic growth lackluster, investors have found that appealing.

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“Investors have been well served by the current global dominance of American tech companies, and yet there is plenty of chatter about changing this winning approach,” Nicholas Colas, co-founder of DataTrek Research, said in a recent note.

In March, some of the best performing tech stocks began to struggle. Facebook’s handling of user data in the Cambridge Analytica scandal contributed to a backlash against the size and reach of the biggest tech companies, and raised concerns that regulators may soon crack down on these firms.

The pullback was a rare dip for a sector that had risen consistently for the past several years. Since stock markets in the United States bottomed out in March 2009, shares of Apple, Amazon, Nvidia, Microsoft and Alphabet have all gained more than 500 percent; Netflix is up 6,500 percent. The S.&P. 500 has risen about 300 percent over that period.

How long can the biggest tech stocks dominate the market? For a while, Mr. Oppenheimer and Mr. Jaisson said. They pointed out that earnings and sales growth, not a speculative increase in valuations, have driven the post-financial crisis run-up.

“Unlike the technology mania of the 1990s, most of this success can be explained by strong fundamentals, revenues and earnings rather than speculation about the future,” Mr. Oppenheimer and Mr. Jaisson wrote.

Price Is What You Pay; Value Is What You Get - Nifty Fifty Edition

 

 

 

Price Is What You Pay; Value Is What You Get - Nifty Fifty Editionhttp://www.fortunefinancialadvisors.com/blog/price-is-what-you-pay-value-is-what-you-get-nifty-fifty-edition

by: Lawrence Hamtil     on Thursday, May 24, 2018

 Subscribe via RSS Every investor is aware of Warren Buffet's famous dictum that, "Price is what you pay; value is what you get."  That of course applies to the valuation an investor is willing to pay for a given company's stock, and the subsequent returns he receives for doing so.  In today's environment, in which commentary focuses on the lofty multiples that characterize much of the U.S. stock market, particularly on some very popular names like Facebook, Amazon, and Netflix, I thought it would be interesting to revisit the "Nifty Fifty" era of the early 1970s, when the Amazons and Facebooks of the day were what became today's boring blue chips:  McDonald's, Merck, Procter & Gamble, and so forth.
At the peak of the Nifty Fifty 'bubble,' many of these stocks traded at extreme premiums to the market, with shares of McDonald's changing hands at a multiple of eighty-five times earnings, and Coca Cola trading at close to fifty times (data via Brooklyn Investor)*:

Given these extreme valuations, I wanted to see how investors in those companies fared had they been willing to pay up to own these names.  To test this, I decided to pick seven names I considered to be more expensive than others, and seven names I considered to be cheaper.  Given that many of the Nifty Fifty names no longer exist due to merger and, in some cases, bankruptcy, I chose for each group names that, as much as possible, exist today more or less as they did then.  Additionally, I wanted to control for sector and industry differences as much I could, so both pools ended up heavy in terms of consumer staple and healthcare stocks.  Finally, I ran the numbers starting on June 1st, 1972 (the earliest date available to me), and calculated the annualized total return for each stock over the subsequent ten-, twenty-, thirty-, and forty-year periods.  Here are the results:

What immediately stands out to me is that, over the initial ten-year period from peak valuation, the cheaper group generally outperformed the more expensive group.  It is important to remember that during this period from June of 1972 to June of 1982 there was a huge market crash and lengthy bear market spanning much of 1973-1974.  Just about all of these names were crushed during this downturn, so valuation did not really matter during the crash.  However, it would appear that the companies with less demanding valuations emerged from the crash in better shape than those with more extreme valuations.
Of the two groups, the two names that jump out to me are Pepsico and Coca Cola.  They both are dominant players in the soft drink industry, with global reach.  Their business models are not all that different from each other.  Yet, at its peak, Coca Cola traded at a 60% premium to Pepsico.  At the risk of oversimplifying things, I would suggest that this huge premium played a large part in Coca Cola underperforming Pepsico by almost 1,000 basis points over the subsequent ten years.   
On the other hand, over the much longer periods twenty and thirty years, both Coca Cola and Pepsico generated similarly strong results, which suggests that starting valuation matters much less over much longer time frames.  This was generally the case for almost all the stocks observed.
The lesson from this exercise, I believe, is that investors should always be conscious of starting valuation when placing their bets.  With few exceptions, eventually valuations that are simply too high will drift back down to more reasonable levels, often at the expense of poor intermediate-term performance.  This appears to be true no matter how revolutionary the new business appears to be, and no matter how much potential you believe it has.  Of course, if your conviction is such that you plan on holding your shares for multiple decades, valuation may indeed matter less to long-term returns, but that is assuming you follow through on your commitment.  Over several years of sub par performance, that is much easier said than done.


*Note, Brooklyn Investor does not specify in his post, but the P/E multiple shown is assumed to be based on trailing twelve-months' earnings.

Why Corporate Profits May Be Weaker Than They Seem

Government data shows profits were weak in the first quarter and would have been down without the tax cut

By

Justin Lahart

Updated May 30, 2018 2:32 p.m. ET

According to companies, profits were great in the first quarter. According to governmenthttps://www.wsj.com/articles/why-corporate-profits-may-be-weaker-than-they-seem-1527701696

Housing Sector Analysis: Headwinds Grow As Rates Tick Higher

There are a large number of public and private services that measure the change in home prices.
The algorithms behind these services, while complex, are primarily based on recent sale prices for comparative homes and adjusted for factors like location, property characteristics and the particulars of the house.

 

While these pricing services are considered to be well represented measures of house prices, there is another important factor that is frequently overlooked despite the large role in plays in house prices.

In August 2016, the 30-year fixed mortgage rate as reported by the Federal Reserve hit an all-time low of 3.44%.
Since then it has risen to its current level of 4.50%.
While a 1% increase may appear small, especially at this low level of rates, the rise has begun to adversely affect housing and mortgage activity. After rising 33% and 22% in 2015 and 2016 respectively, total mortgage originations were down -16% in 2017. Further increases in rates will likely begin to weigh on house prices and the broader economy. This article will help quantify the benefit that lower rates played in making houses more affordable over the past few decades. By doing this, we can appreciate how further increases in mortgage rates might adversely affect house prices.

https://www.blogger.com/blogger.g?blogID=8011256025480883939#editor/target=post;postID=9171519201879917689

Lower Rates
In 1981 mortgage rates peaked at 18.50%. Since that time they have declined steadily and now stands at a relatively paltry 4.50%. Over this 37-year period, individuals’ payments on mortgage loans also declined allowing buyers to get more for their money. Continually declining rates also allowed them to further reduce their payments through refinancing. Consider that in 1990 a $500,000 house, bought with a 10%, 30-year fixed rate mortgage, which was the going rate, would have required a monthly principal and interest payment of $4,388. Today a loan for the same amount at the 4.50% current rate is almost half the payment at $2,533.
The sensitivity of mortgage payments to changes in mortgage rates is about 9%, meaning that each 1% increase or decrease in the mortgage rate results in a payment increase or decrease of 9%. From a home buyer’s perspective, this means that each 1% change in rates makes the house more or less affordable by about 9%.
Given this understanding of the math and the prior history of rate declines, we can calculate how lower rates helped make housing more affordable. To do this, we start in the year 1990 with a $500,000 home price and adjust it annually based on changes in the popular Case-Shiller House Price Index. This calculation approximates the 28-year price appreciation of the house. Second, we further adjust it to the change in interest rates. To accomplish this, we calculated how much more or less home one could buy based on the change in interest rates. The difference between the two, as shown below, provides a value on how much lower interest rates benefited home buyers and sellers.

The graph shows that lower payments resulting from the decline in mortgage rates benefited buyers by approximately $325,000. Said differently, a homeowner can afford $325,000 more than would have otherwise been possible due to declining rates.
The Effect of Rising Rates
As stated, mortgage rates have been steadily declining for the past 37 years. There are some interest rate forecasters that believe the recent uptick in rates may be the first wave of a longer-term change in trend.  If this is, in fact, the case, quantifying how higher mortgage rates affect payments, supply, demand, and therefore the prices of houses is an important consideration for the direction of the broad economy.
The graph below shows the mortgage payment required for a $500,000 house based on a range of mortgage rates. The background shows the decline in mortgage rates (10.00% to 4.50%) from 1990 to today.

To put this into a different perspective, the following graph shows how much a buyer can afford to pay for a house assuming a fixed payment ($2,333) and varying mortgage rates. The payment is based on the current mortgage rate.

As the graphs portray, home buyers will be forced to make higher mortgage payments or seek lower-priced houses if rates keep rising.
Summary
The Fed has raised interest rates six times since the end of 2015. Their forward guidance from recent Federal Open Market Committee (FOMC) meeting statements and minutes tells of their plans on continuing to do so throughout this year and next. Additionally, the Fed owns over one-quarter of all residential mortgage-backed securities (MBS) through QE purchases. Their stated plan is to reducetheir ownership of those securities over the next several quarters. If the Fed continues on their expected path with regard to rates and balance sheet, it creates a significant market adjustment in terms of supply and demand dynamics and further implies that mortgage rates should rise.
The consequences of higher mortgage rates will not only affect buyers and sellers of housing but also make borrowing on the equity in homes more expensive. From a macro perspective, consider that housing contributes 15-18% to GDP, according to the National Association of Home Builders (NAHB). While we do not expect higher rates to devastate the housing market, we do think a period of price declines and economic weakness could accompany higher rates.
This analysis is clinical using simple math to illustrate the relationship, cause, and effects, between changes in interest rates and home prices. However, the housing market is anything but a simple asset class. It is among the most complex of systems within the broad economy. Rising rates not only impact affordability but also the general level of activity which feeds back into the economy. In addition to the effect that rates may have, also consider that the demographics for housing are challenged as retiring, empty-nest baby boomers seek to downsize. To whom will they sell and at what price?
If interest rates do indeed continue to rise, there is a lot more risk embedded in the housing market than currently seems apparent as these and other dynamics converge. The services providing pricing insight into the value of the housing market may do a fine job of assessing current value, but they lack the sophistication required to see around the next economic corner.

Twitter:  @michaellebowitz